Last week, Spanish Prime Minister Mariano Rajoy gave investors and analysts a pleasant surprise, announcing that his country’s budget deficit had fallen to 6.7 percent of gross domestic product in 2012, far below the European Commission’s estimate.

Unfortunately, the lower number is probably wishful thinking on Rajoy’s part, because he excluded the costs associated with recapitalizing Spain’s banks. The European Commission’s estimate was much higher, at 10.2 percent of GDP, because it included them. Read more of this post

Investors worried about Spain’s political stability have been dumping their Spanish holdings and pushing up the country’s borrowing costs after the eruption late last week of a corruption scandal involving Prime Minister Mariano Rajoy.

Until now, the government’s durability had been one of the few advantages that Spain held over fellow euro-area problem- case Italy, a country that has seen almost as many elections as Christmases over the past few decades and is about to stage another.

In reality, the likelihood that the Rajoy scandal will force the collapse of the current right-of-center government is slim. But investors are right to be concerned, because political stability involves more than the survival of a country’s government — it also requires the trust of the electorate in the institutions that govern them. Allegations of corruption at the highest level are corroding that trust in Spain. Read more of this post

Megan Greene is the Chief Economist at Maverick Intelligence, with a particular focus on Europe. She is also a senior fellow at the Atlantic Council, a columnist with Bloomberg and a senior research fellow at Trinity College Dublin. The opinions expressed here are her own and do not reflect those of any employers. Ms Greene offers a strictly independent voice without a political or investment agenda.